All eyes on ECB as Eurozone inflation hits 27-month high

I am City A.M's deputy editor, having joined the newsroom in late 2010 as an economics reporter.

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Julian Harris

THE euro jumped to a session high against the dollar yesterday, after surprisingly high inflation data increased the risk of a hike in interest rates.

Consumer price inflation across the Eurozone hit 2.4 per cent in January, according to a “flash” estimate by Eurostat, the EU’s statistics office.

Inflation in the single currency area had exceeded the European Central Bank’s (ECB) target of “just under two per cent” in December, reaching 2.2 per cent.

January’s rate was the highest since October 2008, when it was 3.2 per cent.

The euro rose around 20 basis points versus the dollar to trade at $1.3662, up around 0.3 per cent on the day. While ECB president Jean-Claude Trichet has said the Eurozone’s historically low levels of rates are “appropriate,” his comments this year have widely been interpreted as more hawkish than usual.

“We are permanently alert [about the threat of inflation],” he said in January. “We are never pre-committed not to move interest rates.”

However, some economists say the inflationary pressures are coming mainly from higher commodity prices, and are likely to be temporary.

“We suspect that January’s uptick in inflation was mainly driven by higher food price inflation,” said ING’s Martin van Vliet. “Unless commodity prices continue to surge, inflation is still set to fall back again later this year.”

“Although we continue to expect hawkish rhetoric from the ECB, they are still unlikely to pull the trigger on interest rates until the fourth quarter of this year,” van Vliet added.